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Non-banks, such as investment funds and insurers, have come
under closer regulatory scrutiny after the sector, less
regulated than banks in parts, grew sharply after the financial
crisis as money shifted from the more heavily regulated lenders.
This shift raised worries about hidden pockets of leverage and
"liquidity mismatches" at money market funds and elsewhere that
could hit financial stability in a crisis through interlinkages
between banks and non-banks.
The Financial Stability Board (FSB), which groups officials,
regulators and central bankers from the G20 economies, said the
non-bank financial intermediation (NBFI) sector shrank 5.5% to
$217.9 trillion in 2022 from the previous year.
This reflected valuation losses, especially as investment funds'
portfolios were "marked to market" to reflect much higher
interest rates which have hit the value of bonds.
NBFI, which still accounts for 47.2% of global financial assets
that total $461.2 trillion, also fell due to higher rates.
"Banks continued to be net recipients of funding from the NBFI
sector, although this funding has been decreasing since 2013. In
contrast, some NBFI entities’ use of funding from banks has
increased," the FSB said in its annual update on the NBFI
sector.
"Enhancements in this year’s report reduced unspecified linkages
across all non-bank entity types and were most notable in the
case of pension funds, where identified linkages increased 25 to
30 percentage points with regard to both claims and
liabilities," the FSB said.
The watchdog's "narrower" measure of NBFI, which has an economic
function such as providing loans and facilitating credit
provision and post "bank-like" financial stability risks, also
decreased, falling 2.9% to $63.1 trillion in 2022.
"This decline can be almost entirely attributed to collective
investment vehicles susceptible to runs," the FSB said.
Regulators have begun taking a closer look at whether assets
held outside the banking sector properly reflect interest rates
that have risen sharply from a prolonged period at historically
low levels.
Markets, however, have now begun pricing in interest rate cuts
by central banks next year.
(Reporting by Huw Jones, editing by Ed Osmond)
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